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How To Become Financially Independent: Step 3 – Invest What You Save

In the two previous posts we covered spending less and saving more. By employing the lifestyle changes in those posts we can begin to pay off our short term debt, build our six month emergency fund, and then if we are choosing financial independence as our goal we can begin investing.

Investing is a complex topic, with no one-size-fits-all approach. Depending on your risk tolerance and willingness to learn about investing, you may wisely choose to invest fairly effortlessly by using Vanguard funds or you may choose to pick individual stocks.

Whatever you choose, make sure to invest as early as possible to take advantage of compounding, invest your money slowly and with caution, and I think you’ll come to find out building wealth comes easily as long as we’re continuing to live with our lives designed to spend less and save more.

Then, here is what we need to do to get started investing:

1. Get a brokerage account

If you don’t already have a brokerage account, I use and recommend Fidelity. They consistently come out on top in brokerage ratings and have low transaction fees. I also can recommend Vanguard.

2. Pay yourself first

Use the adage of “pay myself first.”

This means before anyone else gets our money, we get our money. Automatically on the first of the month, have a certain amount of money withdrawn from where your paychecks go and deposited directly into your brokerage account.

3. Decide who is going to invest your money

Either let someone do it for us or do it ourselves. I like the latter. If you’re just getting started investing perhaps you’re more comfortable having a professional manage your money before deciding to branch out on your own.

4. Decide what you want to invest in

If we’re letting someone else invest for us we won’t have to do anything except answer some questions from our financial planner. If we’re investing ourselves, we might think about using popular funds like Vanguard or even individual stocks. I like the latter.

Ironically, I choose to invest in consumer companies, particularly the Retail, Restaurant and Technology sectors. One of Warren Buffet’s famous quotes is, “Invest in what you know” and for that reason my holdings include companies like Apple, Amazon, Chipotle, Coach, Google, Netflix, Priceline, Panera, Whole Foods and Starbucks.

I chose these companies because I use and am familiar with their products: I own an Apple laptop, I shop at Amazon, I chow down burritos at Chipotle, I get hotel rooms from Priceline, and I shop at Whole Foods.

5. Decide how many stocks or funds to own

We may only need a few funds to be well diversified. If we’re investing in individual stocks we probably want to hold positions in about 15-20 companies.

It takes time to follow that many companies, around two to four hours a week.

If it’s something you think you’ll enjoy doing, you’ll make the time for it. If it’s not you’re probably better off with funds.

6. Be patient

Warren Buffet has said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

The markets will go up and down. Our portfolios will go up and down. Invest in solid funds and/or solid companies and don’t sweat the normal market gyrations.

Your job at this point is to invest regularly through those ups and downs.

Most of us have been through a recession now (2008-2009), so we should understand when and when not to be fearful. In 2008, my portfolio hit a peak on September 22 and dropped to its lowest point on November 24.

My portfolio lost 40% of it’s value in those two months.

I was fine with that, okay, mostly fine with that. But what I learned was that it was an excellent time to invest money in the market because everything was on sale.

7. Understand your time-frame

We don’t invest money that we might need tomorrow, next month, or even within a year or two.

8. Create an investment policy and investing journal

In the book Your Money and Your Brain, Jason Zweig suggests writing an investment policy which is much like a corporate policy. This is an excellent idea because it takes the emotion out of investing, a dangerous trait.

I have written and use an investment policy, and I revise it as needed at least once a year. The other beneficial habit is to keep an investment journal.

My journal consists of an entry for each stock in my portfolio where I write down the date I purchased shares, how many shares I purchased and at what price, along with the P/E ratio and the cash flow yield.

I also note the reasons why I purchased shares and how I felt about the company as an investment at that time.

This has been really useful in order to look back at previous purchases and reflect on the decision to invest at that point and to learn from investing mistakes.

9. Read and learn about investing

There are an overwhelming number of resources on investing. I stick to books rather than the talking heads on CNBC, which both tend to be short-sighted and fear-inducing.

10. Have fun!

Meeting financial goals and watching wealth build is exciting! First, we might have a few thousand dollars and we think we’ll never get anywhere.

Time passes, and those few thousand dollars turn into tens of thousands. Then we think, wow, that was awesome. We’ve never had that much money before!

As time goes by we pass the six figure amount! Then we may pass the $200,000 mark, $300,000 mark, and maybe even reach $500,000. We realize anyone can do this!

For some, an amount of $500,000 may be enough to cover living expenses for the rest of their lives! For others, they might be shooting for $1,000,000.

What we realize is that it takes time to build wealth (#6), there will be setbacks, recessions, unexpected expenses, and the normal bumps along the road, but if we keep spending less, saving more and investing we will be rewarded.

Good question. Each person will be different, however, what’s important is that you are saving and investing for normal retirement – say age 65 – plus early retirement – say age 42. Taking advantage of a 401k or IRA is a must for normal retirement and utilizing one or both vehicles is smart.

Personally, I commit dollars to a 401k to take advantage of the company match (free money) and use remaining dollars to invest in my taxable account for early retirement.
I like IRA’s for their immediate liquidity and as protection against higher taxes in the future – tax diversification.

Hi, Mr. Everyday Dollar!! I have twenty dollars and would like to invest that money, but i don’t know where to go to invest that money. I would love to invest in a company, but i have no clue where online i can that! Please help !! This is my first time investing and i loved your article! Thanks can’t wait to get a response!

Assuming you’ve already paid off any high interest debt and have an emergency fund, investing is certainly something you should be thinking about, congratulations!

If you are working with $20, traditional brokerage accounts make purchasing a low number or partial shares of stocks costly due to high trading commissions.

With that in mind, I like ING’s Sharebuilder (http://www.sharebuilder.com) because they allow you to purchase fractional shares. For example, if you can’t buy one full share of Apple you’ll be able to buy 1/20th, and there’s no minimum investment.

But remember, when we buy a stock we are usually charged a fee to do so. And we don’t want our trading costs to exceed 2% of our total transaction. The lowest fee available from ShareBuilder is $4, so that would mean we’d want to invest at least $200 at a time to stay within the limit (2% of $200 = $4).

Sabrina Maxwell

I had money but didn’t know what to invest in until I meet with a friend who referred me to a professional. He’s a little different but I made an investment that changed my fortune. You need a referral code so that he knows you came thru me. When you email him, include this code in your mail. I’m sure you’ll get your answers.

Mr. Everyday Dollar, I have about 5000 Canadian Dollar. Do you think it is too little to invest? I am a graduate student with busy schedule. But I do not want to be a poor graduate student forever. Thus, I want to make sure of my saving. Do I have to check the stock everyday? Also, I am a foreigner in this country. Can I invest my money? Thank you so much for your response in advance.

5,000 is not too little to invest, it’s more than enough! However, a good rule of thumb is that we don’t want the cost of buying a stock or fund to exceed 2% of the total transaction.

For example, the trading fee at the brokerage Fidelity is $7.95, so that means we want to invest at least $400 at a time to stay within that limit (2% of $400 = $8).

You don’t have to check your stock everyday. It’s best to make an investment with the idea that you will hold the stock for three to five years at a minimum. Of course, you’ll want to stay informed of the news surrounding the company or companies you’ve invested in.

Anyone can invest, resident or not. But depending on your classification (such as resident alien or non-resident alien) there are different tax implications. I’m not familiar with all the IRS rules for your situation, but it would be in the IRS publication 519: U.S. Tax Guide for Aliens.

Poor Graduate Student

Dear Mr. Everyday Dollar!

Thank you so much for your reply! I really appreciated it.

I am completely new to the stock market. I am seriously considering investing some companies. However, How should I pick a stock out of tons of different options? Any tips?

Option 1: Invest in the whole stock market with an index fund like the Vanguard Total Stock Market Index (VTSMX). Easy and low cost.

Option 2: Invest in individual stocks using a service like the Motley Fool Stock Advisor (it recommends two new stocks every month plus 5 re-recommendations of old stock picks). Can be time-consuming and higher cost but with potentially a greater reward.

Hope that helps. Let me know if you have other questions!

Poor Graduate Student

Hi Mr.Everyday Dollar,

Thank you for your advices. I saw your other post about not to invest in an index fund. I think I will also invest in retails and technology, like Amarzon.

But Canadian dollar is doing so badly. I don’t know whether it is a wise decision for me to convert the money into US dollar and invest them here now. Should I wait?

In addition, people cannot avoid going out. Like, you have to social with others. And they always suggest going to restaurants or somethings. And networking is important. It also makes it hard to save money. I live in NYC right at the Mahanttan. I just feel like it is merely impossible to live under 15,000 dollar per year. How would you adjust your spending to match up the living cost in an expensive city like New York.

PGS: You want to ease into any investment that you make. So if you are working with $5,000 then invest it at the same rate that you would be able to save money.

For example, if you can save $500 a month, then invest that $5,000 over ten months. This system will offer some protection because it doesn’t allow you to invest a large sum of money in a narrow time frame.

Fact: NYC is the most expensive U.S. city to live in! It would be a struggle (and is a struggle) for anyone trying to live in Manhattan for $15,000/yr.

There’s not much you can do besides move to a place where your dollars go a lot further in places like Nebraska, Kentucky, Iowa, Arkansas, Missouri, Mississippi and the Dakotas.